Good day and welcome to the Inogen Third Quarter 2019 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Matt Bacso with Investor Relations. Please go ahead.

Thank you for participating in today’s call. Joining me from Inogen is CEO, Scott Wilkinson; and CFO and Co-Founder, Ali Bauerlein. Earlier today Inogen released financial results for the third quarter of 2019. This earnings release and Inogen’s corporate presentation are currently available in the Investor Relations section of the company’s website. As a reminder, the information presented today will include forward-looking statements, including statements about our growth prospects and strategy for 2019 and beyond, expectations related to our sales headcount, hiring expectations and strategy, our expectations regarding international sales and tender activity, HME strategy and expectations, rental strategy changes and the timing and impact of such changes, expectations for all revenue channels, marketing expectations, the rollout manufacturing and cost of Inogen One G5, expectations regarding competitive bidding, our expectation on TAV sales, financial guidance for 2019 and 2020 and expectations for 2020. The forward-looking statements in this call are based on information currently available to us. These forward-looking statements are only predictions and involve risks and uncertainties that are set forth in more detail in our most recent periodic reports filed with the Securities and Exchange Commission. Actual results may vary and we disclaim any obligation to update these forward-looking statements, except as may be required by law. We have posted historical financial statements in our investor presentation in the Investor Relations section of the company’s website. Please refer to these files for a more detailed information. During the call, we’ll also present certain financial information on a non-GAAP basis. Management believes that non-GAAP financial measures taken in conjunction with U.S. GAAP financial measures provide useful information for both management and investors by excluding certain non-cash items and other expenses that are not indicative of Inogen’s core operating results. Management uses non-GAAP measures internally to understand, manage and evaluate our business and make operating decisions. Reconciliations between U.S. GAAP and non-GAAP results are presented in tables within our earnings release. For future periods we are unable to provide a reconciliation of our non-GAAP guidance to the most directly comparable GAAP measures without unreasonable effort as discussed in more detail in our earnings release. With that, I’ll turn the call over to Inogen’s President and CEO, Scott Wilkinson. Scott?

Thanks Matt. Good afternoon and thank you for joining our third quarter 2019 conference call. Looking at the third quarter of 2019, we generated total revenue of $91.8 million, which was in line with our expectations and reflected a decline of 3.7% from the third quarter of 2018. Direct to consumer sales of $37.8 million in the third second quarter of 2019 decreased by only 1.4% from the third quarter of 2018, despite an approximate 40% reduction in sales representative headcount in the third quarter of 2019 versus the comparative period in the prior year. We are pleased to say that the reduction in headcount was mostly offset by an increase in productivity from the remaining sales reps. In addition, we continued to hire new sales reps in the third quarter of 2019 and we are seeing them increase their productivity per our expectations. While direct-to-consumer sales declined slightly in the third quarter of 2019 versus the same quarter in 2018, we remain optimistic in our ability to grow direct-to-consumer sales in 2020 based on these productivity improvements and the planned expansion of the and rental intake teams. Third quarter 2019 domestic business-to-business sales of $30.1 million were flat, compared to third quarter of 2018, primarily due to a decline in orders from one large national provider who buys through our private label partner, offset by increased orders from other providers. Specifically, this provider accounted for revenue of $800,000 in the third quarter of 2019, down from $3.3 million in the third quarter of 2018. In spite of the challenges HME providers are facing in adopting portable oxygen concentrators, which include ongoing restructuring efforts, lack of access to available credit and capital expenditure constraints, we continue to see solid demand from these customers. Additionally, we believe HME providers have been…

Thanks Scott and good afternoon everyone. During my prepared remarks, I’ll review of third quarter of 2019 financial performance and then provide more details on our 2019 and 2020 guidance. As Scott noted, total revenue for the third quarter of 2019 was $91.8 million, representing an expected decline of 3.7% from the third quarter of 2018. Turning to gross margin for the third quarter of 2019, total gross margin was 47.2%, compared to 51.2% in the third quarter of 2018. Our sales gross margin was 48.2% in the third quarter of 2019 versus 52.3% in the third quarter of 2018. The sales gross margin decrease was primarily due to increased mix of lower margin domestic business to business sales versus international business to business sales, partially offset by increased sales mix towards higher margin domestic for active consumer sales. In addition, we had higher cost per unit, primarily associated with Inogen One G5, which was still at a higher cost from Inogen One G3. Although at volume, we expect Inogen One G5 to be our lowest cost product to manufacture, which we expect to occur by the third quarter of 2020. We also had a one-time small contribution of higher cost, primarily associated with the inventory reserves in the period. Rental gross margin was 31.5% in the third quarter of 2019 versus 34.3% in the third quarter of 2018. The decrease in rental gross margin was primarily due to higher service cost, partially offset by increased rental revenue per patient on service, and lower depreciation expense. As for operating expense, total operating expense decreased to 35.2 million in the third quarter of 2019 or 38.4% of revenue versus 38.4 million or 40.3% of revenue in the third quarter of 2018, primarily due to lower personnel-related expenses. Research and development expense…

[Operator Instructions] First question comes from Danielle Antalffy with SVB Leerink.

Hi, good afternoon guys. Thanks for taking the question and congrats on a solid quarter. Looks like the business has stabilized a bit. So, that’s good to see. Ali and Scott, I was hoping you would dig in a little bit more into the 2020 guidance, double-digit growth as you guys talked about last, you know potentially getting back to last quarter. I appreciate the color that you did give on the direct to consumer sales being the fastest growing piece of the business, but wondering if you could talk about some of the puts and takes there when we should start to look at New Aera generating revenue, how much contribution are you, I know you said minimal, but wondering if you can put a finer point on that? And how you are thinking about the B2B domestic business as we look ahead to 2020?

Yes. I can take that Danielle. Thanks for the question. So, getting a little bit more granular on 2020, obviously as you said, we do feel like we have stabilized the business in the third quarter and are pretty proud of our domestic results there, both on the direct to consumer side and the business to business side. On the direct to consumer side, as I said, now it is getting back to hiring at a more moderate pace across all three facilities to have the necessary capacity to continue to expand that business. So, that’s the primary focus now and making sure that we are doing that in an appropriate manner. Obviously with a 40% down in headcount year-over-year on average in Q3 there is a lot of room for us to continue to expand the sales force there, but it also is a significant headwind for us in the first half of 2020 versus the second half of 2020 and particularly in Q1 where we did have a lot of that headcount while they weren’t producing, at the full-level they were producing some level of sales. So, I think that is important to understand. We do expect continued productivity gains on the direct to consumer side, but those should get smaller because as we're looking at it, we’ve gotten a lot of the benefits of the reps coming up the learning curve and getting rid of the reps who weren’t performing and now it’s more moving to more reasonable productivity increases year-over-year that we have seen historically a few percentage points. On the domestic B2B front, looking at 2020, we no longer will have the headwind associated with the large national provider that we’ve been talking about. This year, there really has been a challenge to overcome from…

Okay. That was great color. And then if I could just drill a little bit deeper in the B2B domestic, so if I did the math right, it looks like ex the headwind from the major provider about my 9-ish percent growth, last quarter you had 17% growth, given, I think if I'm remembering correctly, ex the headwind, so given this uncertainty that you're talking about at least in the first half of 2020 is the 9-ish percent more right than the 17%, can you help us a little bit as we think about the models there?

Yes, I do think that closer to that 9% low double-digit level that’s a more appropriate growth rate until we have more clarity on how competitive bidding will come out. Now, obviously this business overall is just lumpier in general, but I think that’s a reasonable assumption.

Perfect. Thank you so much.

Our next question comes from Margaret Kaczor with William Blair.

Hi, good afternoon guys. Thanks for taking the question. I was hoping to switch a little bit to international from the domestic side, maybe initially, maybe walk us through what calls from the tender uncertainty this period around and as we look at guidance both for 2019 and 2020 and it sounds like you may be assuming that international does in fact grow again. So, maybe you can walk us through kind of those dynamics and your visibility into demand in those regions?

Yes, Margaret, thanks for the question. This is Scott and I’ll take that one and walk you through it. As we said in the past, international sales are lumpy. Certainly, quarter-to-quarter we continue to emphasize that. If you look at it year-to-year, we’ve done it really well consistently in international. We’ve had solid growth consistently for the last multiple years, but when you start to drill it down quarter-to-quarter it’s probably more lumpy than anywhere else. If you were to look at the second quarter of this year, you know that was probably a little stronger than average, a little stronger than our expectations and then third quarter was a little weaker, it kind of demonstrates that lumpiness. Now that’s kind of a general comment and let me be peel back the onion and kind of share what we know some key drivers of the softness in the third quarter. First of all, I mentioned some tender uncertainty and we talked about tender uncertainty in the past. We don't include tenders in guidance or expectations because of the volatility there, but generally when you miss out on a tender, you miss out on upside. What we’ve seen recently in the UK is it’s a little bit more than missing out on upside. It’s actually stalled some purchases from some major multinational accounts until some things get resolved. In Great Britain, there is 11 areas that were under tender in the third quarter, our bidding program. These were seven-year contracts with an opportunity to extend the contracts up to 10 years. So, it’s kind of a high-stakes bidding game. You know, a lot of tenders that we talked about in the past tend to be two or three years. These are major markets in Europe, the UK, seven years at risk…

Got it. Understood. And then maybe switching back domestic as well, just to follow-up on what Danielle had asked, and I think the answer you gave was kind of the high single digit growth in B2B domestic until we knew kind of the outlook for competitive bidding. So, maybe diving into that, is that the indication you're getting from your top accounts, does it assume any kind of further pause on purchasing until then? And then kind of big picture strategic over the next two years to three years, what do you guys do within that channel to further stimulate growth, one way or the other and whether that’s price, whether that features or some kind of other advanced products outside of just the ventilation product you referenced? Thanks.

Yes. I'll start and I’ll see if Ali has something to add that’s more granular on numbers, but from a qualitative standpoint, I mean, in the domestic business or B2B market, providers are continuing to try and convert their business to POC's. I mean, they see it, it’s obviously patient preferred, patients are asking for it, but when you look at reimbursement, you know it is really a challenge and we’ve said that the rates for delivering tanks, just – it’s really not sustainable. So, on the positive side, you know that’s where we see the growth in the push is people are trying to change the business and they’re purchasing in POC's and we continue to be the leader, but there are challenges and we’ve talked about those in the past. The competitive bidding issue is one more challenge that they have that’s probably I’ll say, more psychological than anything else. If you don’t know if you’re going to win or lose, then you are going to be more cautious and even if you are a larger play, we said in the past, the large multi-national companies, they are not going to get screened out of the bidding program, even if they lose a region. They will scoop up a mom and pop through acquisition and buy their way back in. So, I don't think they really worry about being out, but I think they do get concerned about or what’s the rate going to be, and that’s more uncertainty that they want to see how that shakes out. You’ve got to sprinkle that and with the other hurdles that they have to make the non-delivery model work, we’ve talked about you have to eliminate the delivery infrastructure and if you don’t do that, then you just pay a…

Yes. I mean, what I would really point to is still how early we are in the market penetration of POC’s at 13.9% with our estimate that that should go to about 68%. So, that conversion is really still what we’re primarily focused on helping the providers with. I do think we have been pleasantly surprised with the rate of G5 adoption. I know, we have said in the prepared remarks that about 40% of the domestic volume in the third quarter was G5 and we know we really started rolling it out domestic B2B during the third quarter. So, we’ve seen really strong adoption there, both from patients and providers. So, I do think that that will help us stay at a competitive advantage over the other POC's. It seems like it is a widely accepted as the best product on the market and we’re happy to see the interest in that product. So, I think that that also will help with the adoption of the B2B accounts. But in terms of the numbers and the guidance, obviously we’re being more cautious, particularly in the first half of 2020 given the uncertainty, but in terms of our own internal process and what we're hearing from customers, you know as part of our guidance setting process, we went and talked to all of our the major accounts and our guidance is based off of the forecast that they give us and the information that they are seeing on what their plans are for 2020.

Great. Thank you, guys.

Our next question comes from Robert Marcus with JPMorgan.

Hi. Thanks for taking the question. Ali, I was hoping first we will start the P&L question, gross margin came in a bit lower than expected, I was hoping if you could just walk us through the puts and takes there?

Yes, sure. So, the biggest impact for us and I know we’ve said this many times over, but gross margin is heavily mixed dependent for us. And when you look at the quarter, we had a much higher percent of domestic B2B and a lower percent of international B2B. And while most people assume that gross margin is similar, given that they're both B2B businesses, they actually are international business-to-business, gross margin is higher than our domestic business-to-business, primarily because the reimbursement pressure is much, much larger in the U.S. So, because of that – because of the decline in international sales that had a large impact on our sales gross margin. We also said and as we said in the prepared remarks, the Inogen One G5 is still coming up to scale. And while it was a large portion of our domestic volume, it was none of our international volume. And so, it's still running at a higher cost than our Inogen One G3 product. And so that also was a driver of our gross margin shortfall in the quarter. On top of that, we also had a small contributor of higher inventory reserves in the quarter, but that was a much smaller contributor versus the other two. So, most of it is mix-related, whether it's customer or cost-related. We also had because of the FX impact, that also drove lower ASPs on the international side on a year-over-year basis as well.

In the U.S., was there any ASP change year-over-year in D2C or B2B.

D2C actually was slightly up year-over-year on an ASP side because of the G5 product coming in. And if you recall, the G5 has $100 premium right now, both the domestic B2B and the international B2B revenue per unit were both down on a year-over-year basis in the mid-single-digit level.

Okay, and D2C?

D2C was up, call it, around that mid-single-digit up.

Got it. Okay. And then just turning to guidance for 2020. It sounded like Danielle’s response; you were saying you're comfortable with the U.S. B2B in the high single-digit plus range until we get a better sense of competitive bidding. The language for guidance and international B2B was similar to that, I know you're always most conservative on that, given you're further away from the end user. Should we be thinking about D2C sales then and something like the mid-teens for 2020, some kind of back into your guidance here?

Yes.

And any kind of color you could give us to build up to the supporting details would be great? Thanks.

Yes. So, because of the comp challenges that we have, particularly in Q1 and Q2, that should be very different than Q3 and Q4 from a year-over-year growth perspective. So, I would have the D2C side in the mid-to-high single digits in the first-half and then increasing proportionally to the high-teens on the back-half of 2020.

Our next question comes from Mike Matson with Needham & Co.

Hi. Thanks for taking my questions. I guess, I just want to start with competitive bidding. Given the lead item pricing, what is your expectation of kind of relative moves of reimbursement for POCs versus tanks? Playing with calculator, it seems like POCs get hit kind of disproportionately hard relative to tanks, but I don't know maybe I'm misreading it?

Yes. So, when you look at the bid calculator, you are right that how the bid calculator works is that any item that's not the lead item gets hit disproportionally harder, because the rates are based off of the 2015 fee schedule. And the lead item in basically every case had gotten hit harder in declines versus the other non-lead items. So, you're correct that both POCs and tanks would see an outsized reduction versus the E1390 lead item, which is the stationary concentrator for the competitive bid regions and POCs would be hit harder than tanks. Now, obviously, we don't know where the rates will shake out, we’ll know that the middle of next year. But we hope that providers have taken that into account. When they did their bids, I think the bid calculator was well distributed within the industry. And this is the case for all of the various items, all of the DMV items. So, I do think providers understood that going in that they need to take into account that the non-lead items will be hit harder than the lead items, and they need to factor in their costs for the non-lead items, but we won't know that for certain, until we actually see where pricing turns out. Now, on the positive side, they have said that they're moving from a median pricing strategy to a maximum pricing strategy. So that may offset some of the potential headwinds from the decline in rates on the non-lead item portion, but also remember that the mass majority of the reimbursement that we receive for our POC is still based on the lead item E1390, because our product is dual coded for both E1390 and E1392.

Okay, that was really helpful. And then I guess, just it's great to see the 2020 guidance where it is coming and where it is, but I guess, just given everything that's happened in 2019, why give the 2020 guidance now? Why not just wait till the fourth quarter when you have more visibility into 2020?

Yes. So, we have as normal – this is the time of the year that we have typically given our 2020, or the next year guidance. This is also when we've completed our budgeting cycle. And frankly, given the challenges that we've seen in 2019, I think, investors want to understand where we see 2020 and understand the puts and the takes earlier rather than later. So, we're trying to make sure people understand the drivers of the business and aren't surprised by what we're seeing and what we're expecting going into 2020.

Okay, thanks. And then just one more, sorry, bidding question on the non-invasive ventilation with New Aera. I can't remember if you said this on the last call, but did you guys or New Aera place bids for the category in 2021?

Yes. We as Inogen bid for NIV in around 2021.

Okay. Thank you.

In the same 129 regions that we bid for oxygen.

Okay, thanks. That’s all I have.

Our next question comes from Matthew Mishan with KeyBanc.

Great, and thank you guys for taking the question. Hi, first of all, it's really nice to see the kind of leverage in the P&L you're expecting in 2020, where you have an increase in sales and double digits and with a kind of low to mid-teens increase in EBITDA. Can you talk about how that double-digit growth compares to kind of sales count and advertising expense in 2020?

Yes. We don't give specific guidance on sales and marketing spend. Obviously, we are focused on trying to show leverage in the business. And the sales and marketing spend in general ties much closer to our D2C sales than our overall sales. There's minimal sales and marketing costs associated with our business-to-business sales worldwide. So, that's a small contributor. So, it tends to follow what's happening on the D2C side usually with a little bit of lag or training as you're investing there, but we do expect to show leverage on sales and marketing spend in 2020.

Okay. And then can you talk through – to walk us back to the size of the classes you're now bringing through, compared to what you did like nine to – six to nine months ago? And kind of how that factors into like a measured approach to sales force expansion?

Yes. I'll take that one, Matt. And we don't share the exact size, but I'll give you some color around it. One of the key things to remember is going forward, we're hiring in all three of our major locations now, whereas before, we were hiring primarily in Ohio. So, what that does is, it allows us to shrink the class sizes have more classes in multiple locations, kind of spread the workout, recruit in different locations instead of all one location. When you onboard a class, it's a much smaller class. I'll say the size of classes now are in a magnitude of – if the classes last year at our peak were x, then classes now are, say, 20% of x. So, a much, much smaller class, but we're still able to drive growth by focusing on all three locations.

Okay, excellent. And then last question, on New Aera, what does like a 2020 rule outlook? Is it an incremental salesforce, same salesforce, same kind of stage three, stage four [COP], customers are you potentially going earlier stage than that as it a bigger market?

Yes. It's a good question, Matt. It's all of our existing sales channels. So, we'll sell it through our direct-to-consumer salesforce as a retail sale. We've, I think, proven ourselves on retail sale. So, we're really excited about what we could do with this product on a retail basis. We’ll also sell it through the B2B community. That's to the homecare providers. And they'll have multiple options to use this in their business. And like POCs, there could be a retail opportunity for the B2B players as well. We've also, if you recall, we've got a relatively small field salesforce of our own that calls on physicians. So, certainly, they will have it as part of our offering, our service offering, and those are essentially the same call points of pulmonologist that our [RDMs] focus on as their first call point. So, everything there is pretty much the same. Now, the second part of your question?

No, it was around – if you could address some of the addressable market?

Yes.

Yes.

Yes. So, we actually see multiple opportunities with the New Aera event technology. As we talked about, we plan to build it into our POC, that's a 2021 launch. We think that strengthens our competitive position and our patient preference on the POC side, and that would primarily address the current ambulatory oxygen therapy market. But again, we see downstream and upstream opportunities. Downstream, you've got the more traditional NIV patients that are, I'll say, generally a sicker patient than your traditional oxygen therapy patients we can participate in that arena. And then if you go upstream, and look at general COPD, we see applications there, which obviously the COPD market is a much larger market than just traditional oxygen therapy, O2 therapy is a subset of the COPD market more or less. So, there's opportunities kind of in adjacent markets from our core oxygen therapy play.

Thank you.

Our next question comes from JP McKim with Piper Jaffray.

Hi, guys, this is Drew on for JP. Thank you for taking the questions and nice quarter here. On the D2C side, I guess, you continue to say that the new rep ads are ramping more similarly to the historical average. And obviously, your commentary that you expect D2C to be the largest growing segment, 2020 is clearly pretty bullish. My question I guess is, just so we can get a little more comfortable without looking at here is kind of how you quantify that ramp and how is it dollars per rep leads converted, et cetera? And then kind of what point in time, approximately how many months do you typically evaluate those repetitions on? I guess the point I'm trying to get at is, as you add reps here in the back-half of 2019, when you start see them – seeing them perform in line with your historical hires?

Yes, it’s a good question. So, let me talk through how we assess productivity and why we have a comfort level of what the reps are delivering now that we brought in relatively new to the business. We have always tracked a rep output in month one, month two, month three, and month four, we've compared that to an historical curve. And so, frankly, when we ran into trouble and say, second-half of 2018, what we saw is the reps that we were bringing in, when we look what they delivered in month one, two, and three, it was well below what reps before them had delivered in month one, two and three. And so that was our first flag that hey, something is it – isn't going according to plan or according to historical and we had to dive in and make some changes and we talked about those changes in the past. When we make the comment now that we're pleased with the productivity of the new reps, it's basically looking at that curve again in month one, month two, month three. We have, we have the advantage now of looking at that over multiple platforms, in multiple locations, across multiple months. So, you get a pretty good feel that, when you've got some positive metrics that it's not a one hit wonder, it's been consistent across the Board. So, we're confident that the changes that we've made both to intake criteria to make sure we get the right sales rep, as well as our training and onboarding programs and we've made some management changes as well, that all of those things are paying off consistently across the Board. That's what gives us that confidence to continue to hire and to drive growth in that matter. Now, as far as when a rep contributes, well, they contribute some in month one. They may not be at a break-even point, but in month one, we expect reps to sell x number of units and we don't disclose those numbers. But they work through a ramp and there's some contribution at the beginning. And we've said that it's generally a four to six-month curve to get them up to what we would call a steady state, or a season's performing rep. And then we expect them to deliver at the same level as somebody that's been here for six months plus that came before them. So, that's our general curve and how we kind of measure that progress going forward.

Very helpful. Thank you. And then you had previously mentioned a pretty large trade show, which I believe just wrapped up in recent weeks. So, I guess, the question is, anything you want to highlight there, or did you see anything new on the competitive front? Thank you.

Yes. We haven't really seen anything materially new on the competitive front. I think if you don't mind me tooting my own horn for a second, I mean, the best new product that I've seen out there is the G5, and that's ours. So, we're pretty pleased with the uptake on that, as Ali said, and I actually said it as well, that in the third quarter 40% of our domestic shipments were G5. That exceeded our expectations and we're very pleased with the reception. We're anxious to get that scaled up in international markets. We've already sent samples over to the major customers, so that they can test them in advance of our launch, which is going on right now. So, I would say, we're pleased that we have the newest most significant new POC on the market.

Thank you.

As we have no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Scott Wilkinson for any closing remarks.

Thank you. We look forward to continue to execute on our vision to make POC’s the standard of care for ambulatory oxygen therapy patients worldwide, and also expand in the non-invasive ventilation markets in 2020. Thank you, again, for your time today.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.